Mortgage Bonds Showing Stronger Technical Outlook

As feared, mortgage bonds lost the battle with their 25-day moving average yesterday, falling to the floor of support provided by the 50 DMA. So far this morning, mortgage bonds have tested both the floor as well as the ceiling.  Given the narrow range that bonds are now trading within, they are certain to make a break in one way or the other in the very near term. I expect to see this either today or tomorrow. Depending upon the direction of the break, mortgage interest rate pricing will soon move in one direction or the other. The fact that bonds are still trading in a short-term upward trading channel gives hope that the break will be to the upside, which will add downward pressure to mortgage interest rate pricing. Let’s hope for the best but also be prepared if the opposite happens.

There is what is called a “Pennant formation” in the bond charts. This is a predictor of a breakout coming. Given that bonds are trading within a narrow 17 basis point range, a breakout is easy to predict. When this occurs, bonds generally breakout in the direction they have been trending. Given that the longer-term direction if for higher bond prices (lower mortgage interest rates), we expect to see improved pricing ahead. Although this isn’t always accurate, it certainly is encouraging.

Given the positive technical outlook, odds are better that rates will improve. However, if you aren’t a risk taker, go ahead and lock to avoid the potential of the markets not moving as we hope.